Photronics, Inc. Price & Performance (PLAB)

Photronics has provided additional information in its most recent Form 10 ks other subsequent reports filed with the SEC concerning factors that could cause actual results to differ materially. [indiscernible] During the course of our discussion, we will refer to certain non GAAP financial measures. These numbers may be useful for analysts, investors and management to evaluate ongoing performance. A reconciliation of these metrics to GAAP financial results is provided in our presentation materials. I will now turn the call over to Frank. Thank you, Ted, and good morning, everyone. We achieved first quarter sales of $212,000,000 dollars in line with our expectation and normal seasonal trends. Non GAAP diluted EPS of $0.52 was above the high end of guidance. And we once again delivered strong cash flow. Turning to our end markets. IC declined 2% year over year. Due to mainstream weakness in Asia and Europe particularly at the older nodes within mainstream. For high end IC, we have seen continued evidence of logic Photronics no migration to '22 and twenty eight nanometer in Asia. Within IC, memory Photronics demand also shows strength. FPD declined slightly year over year. Due to industry softness Though we saw brand demand from customers in China, Our industry leading technology in FPD, continues to win business.

And our strategy to apply IC Mass technology to FPD helps us win market share. We recognized a milestone during Q1 as we received our first orders for G8.6 AMOLED displays. G8.6 requires more advanced and complex mask that had higher ASPs. Now I would like to discuss a few development impacting the semiconductor industry. First, as the AI landscape evolve, we believe it will be a longer term growth driver for the industry and for New AI tools have the potential to offer AI capability at a lower cost.

These tools reduce the barrier of entry into AI which drives new applications, required new devices and designs. Customer IC serving this application will drive Photronics demand. [indiscernible] mainly at a more advanced nodes that we service. At more mature nodes, AI drives the need for fast interconnects including silicon photonics and advanced packaging. Second, the semiconductor industry may potentially incur increase costs from tariffs. For Chinese, our strategy to invest in regional capacity close to customer locations should buffer us from this potential cost. Therefore, we import very few masks into The United States. And don't anticipate a meaningful impact on our business from tariffs. Fiscal twenty twenty five started off as expected in Q1. And demonstrate our technology leadership. Industry growth drivers in IC include no migration, regionalization, and custom design expansion while product development and scale up of display size are key for LPD. Further, our markets are benefiting from AI adoption and regionalization trends. Where we leverage our competitive advantages in capability, cost, scale and time to market. By working with our customers, we are carefully expanding capacity and capability in projected growth regions such as The United States to meet demand. These investments further strengthen our market leadership position giving us confidence in our long term outlook.

I will now turn the call over to Eric to review our first quarter results and provide second quarter guidance. Thank you, Frank. Good morning, everyone.

As Frank stated, our first quarter results were in line with expectations, which revenue of $212,000,000 Total revenue declined 5% sequentially led by IC which declined 6% quarter over quarter to $154,000,000 Within IC, mainstream declined 9% reflecting the overall softness of the broader semiconductor industry. [indiscernible] did see pockets of strengths within high end. Sales generated out of our European facilities weaker than anticipated and this situation is expected to continue. Our IC business out of our facilities in Asia and The U. S. Also declined sequentially to typical seasonality as expected, though U. S. IC did exhibit strong year over year growth.

Within IC, we continue to drive towards a greater mix of higher end business a focus on increasing our blended ASPs. Demonstrating our execution, in fiscal year twenty twenty three, our high end business represented 30% of total IC revenue. Increasing to 36% in fiscal year twenty twenty four. For the first quarter of fiscal year twenty twenty five, our high end business increased further to 39%. Within high end, we saw a particular strength in Q1 in the 4Q to '22 nanometer geometry ranges. For our leading edge IC mix, recognized improved demand from memory customers. FPD revenue was stable both sequentially and year over year at $58,000,000 We are the market leader in FPD photomasks, due to our technological superiority, As a result, despite market headwinds we have been able to maintain our revenues due to increasing market share. Our operating margin of 25% was at Gross margins declined slightly to 36% because of lower sales volumes. Continued prudent controls along with lower severance and legal related expenses and lower R and D reduced OpEx by $2,900,000 sequentially. Diluted GAAP EPS attributable to Photronics shareholders After removing the impact of FX gains, fully diluted non GAAP EPS attributable to Photronics shareholders were $0.52 per share, which was above the high end of our guidance.

Our FX gain was an unrealized benefit primarily related to the impact of the strengthened U. S. Dollars on intercompany balances cash and accounts receivables held our foreign subsidiaries. During the first quarter, we generated $78,000,000 in operating cash flow represented 37% of total revenue. We continue to build on our strong cash balance providing us continued financial flexibility. CapEx was $35,000,000 in the quarter, We remain committed to spending $200,000,000 in CapEx in 2025 on a combination of capacity, capability and end of life tool initiatives This run rate is higher than typical, to accommodate U. S. Expansion initiatives that's underway. I want to emphasize that our capacity expansion plans are driven by specific customer opportunities and go through a rigorous investment vetting process. These investments will strengthen our ability to support and win the most attractive Photronics opportunities. Total cash at the end of the quarter was $642,000,000 dollars and remained relatively unchanged from the end of fiscal Q4 driven by CapEx debt repayment, stock repurchases and the effect of foreign currency exchange rate changes on our cash balances.

We have a modest $3,000,000 of debt remaining. Before providing guidance, I I'll remind you that demand for our products is inherently uneven and difficult to predict with limited visibility in typical backlog of one to three weeks. [indiscernible] addition, ASPs for high end mass sets are high meaning a relatively low number of high end orders can have a significant impact on our quarterly revenue and earnings. As we have highlighted previously, our business is influenced by IC and the display design activity and to a lesser degree by wafer and panel capacity dynamics. With those qualifications, we expect second quarter revenue to be in the range of $2.00 $8,000,000 to $216,000,000 Based on those revenue expectations and our current operating model, we estimate non GAAP earnings per share for the second quarter to be in the range of $0.44 to $0.5 per diluted share. This equates to an operating margin between 2325%. Given current market conditions and our Q2 outlook, we're increasingly cautious about 2025. In order to continue to drive cash flow, we will continue to prudently manage cost. I will now turn the call over to the operator for your questions. Thank you.

Our first question comes from the line of of Tom Diffely with D. A. Davidson. Your line is open.

Yes. Good morning. Thank you for letting me ask a few questions here. Maybe first one for you Frank. The outlook is for basically flat quarter over quarter and typically we see roughly 5% increase in the first or the second fiscal quarter first quarter of the year. So I'm curious, is it really just the mainstream and China that is the weakness? Is it just your ongoing lack of real visibility and conservatism? Or what's behind just the flat guidance?

Thanks, Tom. Business of the very low end of mainstream mainly from the sixteenth gen eight inches wave effect has been weak and we see no signs of recovery in the near future.

And this happened only in Asia, but also in Europe.

Particularly.

So I think this revenue of is relatively small in our overall business. But it still has some negative impact our revenue and revenue outlook.

So I think at this moment, we are cautious However, long term outlook will still believe it's a positive and we will continue to focus and leverage our competitive strength on the high end to improve our branded ASP. So I believe Q2 has more at this moment our forecast is But I think the overall economic picture remains kind of uncertain. So I believe by the end of Q2, we may have a much clearer picture of fiscal twenty twenty five.

Okay. That makes sense. If I could just dig in a little deeper on the mainstream business then Obviously, over the last few years, the demand levels and the supply demand equation and mean Stream was very beneficial to you. You had nice margin expansion in that space. So just curious, how do you look at the supply demand equation today in mainstream? And what are you seeing on the from a pricing basis? Has pricing strength gone away? Are you seeing some weak Okay. We keep our pricing firm. We do not lower our price in the mainstream. However, the overall pie of the mainstream business at this moment seems to be [indiscernible] I believe it's due to the weakness in automotive and maybe industrial applications. As I highlight, most edge and six inches wafer fab fab utilization relatively low. So it does have some impact on our low and mainstream business.

Okay. Maybe just one last question on the mainstream. Are you seeing increased competition from local Chinese suppliers? For photomass? Yes. We do see increasing However, our focus in China is on middle and high end of our in the middle and high side of our high end business, such as 55 nanometer forty, twenty eight and twenty two nanometer. [indiscernible] most of our business to these segments. Such that our branded ASP in China still keep a good and stable high range. So [indiscernible] SICS, there are more competition from local Chinese mass makers in the low end of the mainstream But that is not our focus So we are getting to the more profitable and more high priced segment of the business in China.

Great. Appreciate the extra color there, Frank. Maybe just a quick question for Chris then. Congratulations on the new Genpoint six Amulet screen. What were the challenges to get to that larger screen size or panel size?

Yes. Thanks, Tom. Appreciate it. The specs for the AMOLED mass, which prior to this had been all Gen six Gen 6.5 are the tightest among our FPD products. So we had to scale those specs up to the much larger substrate size Gen 8.6. So it's kind of spec scaling, uniformity, all the mass parameters had to scale up to those larger substrates, which is quite difficult. The second thing is the integration of the mask onto the blank. We use some advanced as you mentioned in the comments to the call, some IC like technology in our FPD mask things that people call phase shift and other other things that are common. And I see we use that in our FPD technology. Scaling that up to Gen 8.6 also was a challenge. So met those. We've been working on Gen 8.6 scale up. By now for almost a year. So we were kind of ready for this. And it's really in good coordination with the customer. We had lots of test masks and pilots ahead. So I would not say we're struggling with yield or execution or delivery from here. So as the business grows, we should be able to scale that product line up nicely.

And how big do you expect that to be inside of your flat panel business over the next few quarters?

Yes, I don't think we would prefer not to comment on that.

Think just to suffice to say so far it's been more than a single order and it's connected with fab project or projects that are production level. So these aren't we're not just prototype masks or pilot masks. They were masks used for Prudential production of AMOLED for larger format displays, particularly things like laptops. So it they are production applications and the fabs they're going into.

Have the possibility to scale to serious panel production. For volume products. But beyond that, I think it'd be a little too early. To put a scale on it.

Okay. Appreciate it, Chris. And then Eric, looking at the balance sheet, obviously, really strong cash position. There is going to be $200,000,000 of spending in CapEx this year. But it seems like there's still plenty of cash for a more aggressive buyback. What is your mindset on buybacks versus I know at one point a year or two ago you guys have talked about potentially keeping a war chest for acquisitions. But what is your thought process on the balance sheet right now?

Thanks, Tom. So with respect to the balance sheet, our capital allocation strategy really hasn't changed, which is [indiscernible] the first, it's like three bullet points. The first one being just normal CapEx and the second and third option are are our toggles The second will be M and A. Activities or if they're in lack of them, then we would do share repurchases. During the quarter, we certainly repurchased some shares.

And in terms of what do we see going forward, given the current macro, economic conditions and the geopolitical environment at the moment, we are being a little cautious but we certainly do have we have the war chest as you described it to to be able to act quickly if the right opportunity comes along with respect to an M and A transaction.

We are not going to just go to do a eliminate transaction to use of our cash or to purchase kind of buy revenues, if you will. We will only do that if if it's accretive to the company. Likewise, we'll be aggressive with share repurchases if we see that environment is is favorable to do so at the right time. So this is something that we do look at on a consistent basis. The Board and management team, we are aware obviously, of the cash balance that we we have and we're consistently monitoring and looking for the best way to deploy that.

Great. And what is your current authorization for buybacks?

We have $100,000,000 authorization.

Okay, great. And then final question overall go ahead.

So I'm sorry, go ahead.

Well, I was just going to say the final question overall is, it looks like node migration getting more business of the 2022, 20 nanometer node is going to be a big driver over the next year. Just kind of curious where you think you can say about your current capacity there and how much capacity you'll be adding with this hundred million dollars of capital spending this year?

Yes.

So the capital spending that we have this year would be as I think we mentioned previously, it's normal CapEx that we have plus the increase from the normal to $200,000,000 is essentially for The U. S. So in The U. S, we have due to regionalization, we have some more opportunities for revenue and certainly provide some node migration within the mainstream area in The U. S. And likewise, in Asia, part of our normal CapEx, we have we're putting point tools wherever we need to in order to enable us to to be able to be more effective and efficient in kicking out more production where we have some bottlenecks and that certainly is aiding our node migration strategy.

Great. I appreciate the time for all three of you.

Of course, Tom. Thank you for asking the questions. Thank you, Tom.

Please stand by for our next question. Our next question comes from the line of Gauzy with Singular Research. Your line is open.

Hi, good morning. Can you guys hear me?

Yes, we can.

Okay. Thanks. Thanks, Ted, for including us. Just on the first question is, how much of The U. S. IC capacity coming online in mid-twenty twenty six is I'm on the long term purchase agreements What is driving that strong demand? Is that strong demand on U. S. Based AI edge chip customers Maybe you can quantify the percentage of customer commitments that tied to the chip act versus organic demand?

So I'll take a stab at answering that question. Your question was it very clear from just to be clear, but I think you're asking about what is it that we're seeing in The U. S. That's going to for which we're doing some CapEx. So I'll mention that our customers are certainly in The U. S. Have indicated that they will like us to provide provide service them here in The U. S. Market essentially. And that is what's driving our increased CapEx in The U. S. In terms of whether we have some agreements with them, that will secure that. I wouldn't say we have like a take or pace because we don't generally do not have take or pace here in our business at all.

We do have customer commitments and indications of that they would support us in the event that we do this. So that's typically the level of support that we can that we can get from our customers in our industry. And that's what we have. And as such, we feel comfortable investing the amount that we're planning to invest here in The United States. Does that address your question? And I apologize [indiscernible] through. No.

I was kind of looking for to see if there's any what was that what was the part of that expansion that's kind of tied to the CHIP Act versus kind of the organic demand?

So that would be organic demand. So for the most part, With respect to the chip pack, that's this is not necessarily contemplated in this CapEx at this time.

Okay.

Yes, if the infection is how much of capacity we're putting in particular in The U. S. Are linked to customers that are getting funding through the CHIPS Act.

It's not a significant bar. Most of the projects we're tracking in The States are projects that we believe would proceed with or without chips funding. So we don't see a lot of let's say, risk in the ones that we are tracking that are connected to those customers getting chips funding.

We also have reported applied for chips funding under the second no the small supplier no flow.

Applications are still under consideration. But the current investments we're contemplating and talking about here are being done separate and apart from what we'd invest invest additionally with the chips opportunity.

Got you.

And in terms of the node migration to 22, 28, how much of that demand do you think is going to is that how is the the 14 and the EUV compatible mask trending? Are you seeing any increased traction or increased from the AI [indiscernible] We see mostly AI driven business for us. We see mostly adjacent or second order effects from AI. So and we I would say we see some of that in different regions around the world. These are support chips for the AI ecosystem, designs of new chips for edge devices and things like that that can take advantage of the AI ecosystem. I think we are definitely seeing some pull from those applications. We not really appropriate to quantify it, but it is a positive trend On the memory side, we mentioned that memory is relatively small part of our IC business. But it was one of the stronger growing segments. That is connected also to AI demand and cloud demand and that sort of thing. So we're definitely seeing a lift from that application driver and we expect that to continue to grow as we look ahead in future quarters and years.

So post 2026, as the full capacity of your CapEx comes into line, Do you see do you have an idea what what percentage of the high end IC revenue might be tied to supporting that AI infrastructure?

Yes, I don't think we would we would say what percent of our high end revenue at that time would be AI driven? So it's difficult to say yes.

I mean, I think it will be a significant part but would not be wise to put a specific percent on it at this point.

Okay. In terms of auto industry, auto and industrial softness, it's kind of persisted for multiple sector quarters now. Any sign of inventory restocking or new design wins in the sector for your mainstream I mean, I can make another comment on that, maybe Frank or Eric. Could follow-up. But I would say still looks fairly weak in that market. And here's the automotive market. There's units are down and there is some ASP pressures because the end users are struggling, so that always drives some ASP pressures. And I would say at the moment, we don't see significant uptick. Maybe we'd say some stabilization is not dropping significantly from where it is. But as far as a big turnaround in the automotive sector, I don't believe we're really seeing it at this point.

In China, and Frank could probably comment further, there is more activity going on in automotive design Some portion of that is government backed and government funded. But still the supply demand situation is not really healthy.

Also in China on the automotive side. [indiscernible] We see the design activity seems to decrease in these two segments. At this moment. So I believe the end product business softness impact the the new chip design.

Okay. In terms of geographic mix for driving H2 how are you guys thinking about the tariffs, the subsidies impact regional pricing I'm sorry, If you don't mind repeating the question, I'm not sure it came through.

In terms of how as we think about H2 of 2025, and the geographic mix, how do you look at the geopolitical landscape and how does that impact the regional pricing?

I see. So thanks again for the question. For being the question actually.

So given the current macro and geopolitical conditions actually we we're increasingly cautious.

So we don't have a a great visibility at the moment as how the second half is going to be We expect to have a better picture in Q2 But the question is a great one. It's just that the current environment doesn't allow to see what that is. At the moment. [indiscernible] as we model for fiscal twenty twenty five, looking at R and D costs declining as as the project qualifications kind of taper off?

I think I would best describe it as probably I mean, that's we don't have a great picture as I mentioned right now as how the second half is going to be. But at the moment, if I just were to comment what we see in the moment, definitely don't see it increasing So I think if we take that position at least stable that would be the best thing I can give you a comment on. And in the past, our with respect to OpEx, we do expect OpEx to be about 10% of growth. Revenue going forward. That's our target. [indiscernible] [indiscernible] on the qualification side, just to make a comment, the goal of course is as we complete one set of qualifications, start new ones after those. So I agree just supporting and seconding Eric's comment. I think steady state store sort of pictures probably pretty good way to look at the R and D Okay. And in terms of outlook, what would you say were your top two risks for 2025? Is it the macro demand and geopolitical tensions or customer delays?

Do you want to quantify Yes, I would say, I think you hit them all.

Answer your question, the top two, I would say I would say the macroeconomic and the geopolitical.

Okay. That's all I had. Thank you guys for taking my questions.

Good luck. Of course, thank you.

You guys Thank you.

Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Tae for closing remarks.

Thank you, Jovada, and thank you everyone for joining us today. We appreciate your interest in Photronics. We look forward to catching up with everyone over the coming days and weeks. Have a great day.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect. [indiscernible]